Street Cheers Aetna-Coventry Deal; Here’s What Analysts Said

By Avi Salzman

Aetna (AET) said today that it will buy Coventry HealthCare (CVH), an insurer with significant exposure to Medicare and Medicaid, for $7.3 billion, including Coventry’s debt. The deal will add more than 5 million members to Aetna’s rolls.

Aetna made the deal to boost its Medicare and Medicaid business, and to gain access to Coventry’s “local market” exposure as the company prepares for the start of the local health exchanges dictated by Obamacare. Privately run insurance exchanges will give consumers new options to buy health insurance in their states, and could create new opportunities as well as competitive pressures for private companies.

Other insurers have also looked to deals as they get ready for Obamacare: Wellpoint (WLP) recently agreed to buy Amerigroup (AGP) to boost its Medicaid rolls.

The acquired company almost always gets a boost when an earnings deal is announced, but the acquirer sometimes lags. Not today. The Street clearly likes Aetna’s side of the deal, despite the 20% premium the company is paying for Coventry based on its Friday closing price. Aetna shares are up 4.1% this morning, with CVH rising 19%. Analysts were generally very positive on the deal. Here’s a rundown:

Thomas Carroll, Stifel Nicolaus: “In our opinion, this is a good deal for Aetna and one it had to make to effectively compete amongst the larger MCOs over the next decade. Deal is expected to close mid-2013. In addition, former CVH chief financial officer – Shawn Guertin – is a senior financial executive at Aetna. As such, the due diligence and integration process is likely well informed and may increase the probability of a successful deal.”

Kevin Fischbeck, Bank of America/Merrill Lynch: “Net, we think that the deal is a good one for AET who has holes to fill in both its Medicare and Medicaid books and is able to do so at multiples well below what it would have cost to buy pure play operators, although we believe there will be some questions as to why it chose CVH who also has a large commercial book (mostly individual and small group) which has significant exposure to the risks around HC Reform.”

Peter Costa, Wells Fargo: “We believe this transaction makes sense for both Aetna and Coventry. Coventry adds to several of Aetna’s targeted growth areas (including retail Medicare, Medicaid, and narrow networks) without requiring Aetna to pay too high a multiple, especially considering the $6.00 per share in unregulated cash at Coventry. Aetna had warned transactions needed to be completed before the middle of 2013 (which meant announced relatively soon) to avoid becoming a problem integrating before the significant changes in the health care market coming in 2014 from health reform.”

Justin Lake, JP Morgan: “While certainly enhancing we don’t see this as a game changer in terms of government focused capabilities for Aetna going forward. We do not see CVH as bringing to the table market leading positions in either individual Med Adv (such as HS brought to Cigna) or Medicaid (such as AGP brought to WLP). Aetna’s starting position in these segments pre-deal is also stronger than those of peers who recently bought government focused businesses. Looking past initial accretion from SG&A and towards growth, the ability of Aetna management to leverage enhanced capabilities to become a top-tier competitor in individual Med Adv and Medicaid will likely define how the deal is perceived over the intermediate and long-term.”

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